US Tariffs Spur Volatility, Trigger Risk Aversion
US President Donald Trump's recent tariffs on Canada, Mexico, and China have sparked a surge in market volatility and a flight to safety across asset classes.
The unexpected imposition of 25% levies on Mexican imports and 10% on Chinese goods sent shockwaves through markets. Analysts warn of potential adverse effects on global growth, inflation, and Federal Reserve rate cuts.
The Cboe Volatility Index (VIX) surged to a one-week high before settling at 18.43, indicating increased investor anxiety. Currency markets also witnessed a rise in implied volatility, with the most significant impact felt in target currencies.
Implied volatility for the dollar/Mexican peso pair reached 15.6, its highest since November 2022. The dollar/Canadian dollar pair also saw a spike to 9.3, its highest value since November 2022.
Despite prior anticipation of tariffs, the intensity of the market reaction suggests investors were unprepared for the swift and aggressive implementation. Karl Schamotta of Corpay highlights that investors initially underestimated the seriousness of Trump's statements.
Uncertainty remains as negotiations between the US and other countries could potentially avert tariffs. However, the "unpredictability" of the situation contributes to the surge in option volume, according to Mandy Xu of Cboe Global Markets.